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Financial Frictions, Trade, and Misallocation

David Kohn (), Fernando Leibovici () and Michal Szkup

No 385, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate the extent to which financial frictions shape the effects a trade liberalization has on aggregate total factor productivity (TFP) and capital misallocation. We study a small open economy populated with heterogeneous entrepreneurs who differ in their productivity and are subject to financing constraints. Individuals choose whether to be workers or entrepreneurs, and entrepreneurs choose whether to export or not. We show how financial frictions distort these decisions and aggregate TFP. We calibrate the model to match key features of Chilean plant-level data and use it to quantify TFP losses due to misallocation. We then investigate how the presence of financial constraints affects the output and TFP gains from a trade liberalization. We find that lowering trade barriers has a stronger positive effect in less financially developed economies. The higher profits that result from a trade liberalization allow firms to accumulate assets and relax their credit constraint, which is particularly valuable in economies where firms are severely constrained.

Date: 2018
New Economics Papers: this item is included in nep-dge, nep-ent, nep-fdg and nep-int
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